Tonight, next-generation lighting and display enabler Universal Display (NASDAQ:PANL) will report third-quarter 2006 earnings, and one Fool is here to illuminate the scene around this Rule Breakers pick.

What analysts say:

  • Buy, sell, or waffle? Five analysts follow Universal Display, and three of them recommend that you buy now. The other two are simply holding. In Motley Fool CAPS, this five-star stock garners 53 bullish all-star opinions, with a single dissenter.
  • Revenues. Wall Street expects, on average, $3.9 million of revenue, up from $3.37 million a year ago.
  • Earnings. Last year, Universal Display saw a $0.10 loss per share. This time, analysts are willing to settle for a bigger loss, $0.12 per share or thereabouts.

What management says:
In the latest quarterly report, CFO Sidney Rosenblatt noted that Universal Display is now shifting away from pure research grants to a more commercial revenue mix: "Our revenue mix continues to shift as we recognize more from fees associated with our licensing agreements and revenues from the sale of commercial chemicals. We expect this trend to continue as our PHOLED technology is more broadly commercialized; however, revenues will remain difficult to predict on a quarter-to-quarter basis."

What management does:
Universal Display isn't yet a self-supporting business. The fat gross margins result from accounting for research grants and the like as revenue, while most of the expenses for the same development programs land under R&D in the operating expense category. Research costs account for the lion's share of all expenses, and cutting development in half would make the company profitable today. But it would also break most of the revenue-generating research contracts, and Universal Display prefers to expand its research facilities and invest in its future.

Margins %

6/05

9/05

12/05

3/06

6/06

Gross

93.0

93.2

92.9

93.2

92.8

Op.

(184.2)

(171.3)

(172.1)

(135.9)

(151.4)

Net

(195.0)

(153.9)

(155.7)

(119.9)

(129.3)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As a shareholder in Universal Display, I am excited to see the company ramping up research operations and hiring more scientists, even as net losses continue to mount. That's because this company isn't the only game in town when it comes to organic light-emitting diode (OLED) technology, and its rivals are working equally hard on competing technologies. You have to spend money now to make money later.

And the opportunities here are enormous. Think about it: Universal Display wants to 1) revolutionize general, everyday lighting, making the light bulb as obsolete as the eight-track; 2) do the same to display screens, first small ones on our cell phones and other gadgets, but in time replacing TVs and plasma screens too; and 3) create entirely new markets with flexible, rollable, see-through displays and whole-wall lighting fixtures. Just for starters.

The company has serious manufacturing relationships with leading display manufacturers like AU Optronics (NYSE:AUO) and Samsung SDI, not to mention Seiko Epson and Konica Minolta on the infrastructure side. The U.S. Army and Navy are sponsoring the flexible display and general lighting programs. If most of these initiatives fail utterly, it would only take one major success to give Universal Display some serious market power and massive revenues -- with all the hard work of developing these technologies already done. And only last quarter, the company received its first commercial license payment.

I can't say whether tonight's report will be good or bad, since the contract revenues can be very lumpy, but it doesn't really matter. If you buy now and expect to hold for at least a few years, expect major volatility, but just hang on. It's hard to say whether this party has quite gotten started yet, but when it does, this joint will be jumping.

Competitors:

  • CambridgeDisplay Technology (NASDAQ:OLED)
  • Eastman Kodak (NYSE:EK)
  • Canon (NYSE:CAJ)
  • Koninklijke Philips (NYSE:PHG)
  • Dow Chemical (NYSE:DOW)

Universal Display is indeed a bona fideRule Breakerspick. Take a free 30-day trial of our iconoclastic newsletter service to find more of tomorrow's leaders today. Dow Chemical is an Income Investor selection.

Fool contributorAnders Bylund is a Universal Display shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdingsif you like, and Foolishdisclosureis always a bright idea.